NEW -- MER says going to 0 ---New Century shares drop 69% as subprime sector sinks
Monday, March 05, 2007 4:22:57 PM (GMT-06:00)
Provided by: Reuters News
By Jonathan Stempel
NEW YORK, March 5 (Reuters) - Shares of New Century Financial Inc. <NEW.N> dropped 69 percent on Monday on fears it could go bankrupt as rising concerns about defaults triggered a broad sell-off in the mortgage-lending sector.
Subprime lenders, which make loans to people with poor credit histories, suffered the biggest declines.
But the meltdown also spread to Countrywide Financial Corp. <CFC.N>, the largest mortgage lender, whose shares fell on concern that even homeowners with good credit scores will miss more payments.
The KBW Mortgage Finance Index <.MFX> fell 3.7 percent.
New Century, the largest independent U.S. subprime lender, said late on Friday that federal prosecutors and securities regulators were examining accounting errors and stock trading.
New Century, a real estate investment trust based in Irvine, California, said that if it doesn't get relief from its own lenders, its auditor may find "substantial doubt" about its survival prospects.
"We think there is further downside risk, possibly to $0," wrote Merrill Lynch & Co. analyst Kenneth Bruce. "Bankruptcy seems a likely course of action."
New Century is "much closer to (a) death spiral, if not already in it," Bruce said.
New Century did not immediately return a call for comment.
Four other big subprime lenders -- Fremont General Corp. <FMT.N>, Accredited Home Lenders Holding Co. <LEND.O>, Impac Mortgage Holdings Inc. <IMH.N> and NovaStar Financial Inc. <NFI.N> -- each fell more than 25 percent.
Subprime lenders are struggling because of slowing home price appreciation and rising default rates.
Lax underwriting standards have led to a surge of "early payment" defaults, where new borrowers miss some of their first payments.
Many subprime lenders are being forced to buy back loans at a loss, and several have quit the business or have gone bankrupt in the last three months.
HSBC Holdings Plc <HSBA.L><HBC.N>, Europe's largest bank, said on Monday that subprime weakness had helped to push up North American bad debts by 38 percent last year to $6.8 billion.
FREMONT FALLS
New Century said it was not in compliance with 16 financing agreements totaling $17.4 billion because it was filing its annual report late.
Just six of 11 lenders have waived a requirement that it be profitable for two straight quarters, it said.
Probes into New Century are looking at trades before Feb. 7, when the REIT projected a fourth-quarter loss and announced a restatement. Its shares fell 36.2 percent the next day.
New Century shares closed down $10.09 at $4.56 on Monday.
The stock is down 93 percent from its peak of $66.95 in December 2004.
Shares of Fremont, the second-largest independent subprime lender, closed down $2.82, or 32.4 percent, at $5.89.
The Santa Monica, California lender said on Friday it may sell its subprime business.
It has stopped making subprime loans, and on Monday it put "many" of its roughly 2,400 residential mortgage workers on paid leave.
Fitch Ratings and Moody's Investors Service downgraded its debt.
Among other subprime lenders, Accredited shares fell 26 percent to $16.06, Impac 32 percent to $4.05 and NovaStar 40.9 percent to $4.28.
The cost of protecting bonds backed by New Century loans against default is up 29 percent since Feb. 8, while the cost of protecting bonds backed by Fremont loans is up 121 percent.
COUNTRYWIDE DOWNGRADED
Delinquencies and defaults are also increasing among "prime" and "Alt-A" borrowers, who have less credit risk.
Shares of Calabasas, California-based Countrywide, which is also the fourth-largest subprime lender, fell after Lehman Brothers Inc. analyst Bruce Harting downgraded the company to "equal weight" from "overweight" and cut the "prime" mortgage sector to "neutral" from "positive."
"The rapid high-profile demise of the pure-play subprime lending industry has caused major, real dislocations in the market that should negatively impact the prime-oriented lenders' earnings over the course of 2007 at the very least," Harting wrote.
Countrywide last week said borrowers were making payments late on 19 percent of the subprime loans it services.
Washington Mutual Inc. <WM.N> shares fell after Credit Suisse analyst Moshe Orenbuch said the largest U.S. savings and loan may need to boost reserves by $300 million for subprime losses.
Alan Gulick, a Washington Mutual spokesman, said the thrift does not comment on analyst reports, or provide mid-quarter updates on reserves.
Countrywide shares closed down 4.9 percent at $35.20, while Washington Mutual fell 3.4 percent to $41.13.
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